DarthMaul09 (29.45)

The World's Central Banks other Nuclear Option

9

Besides massive QE by the world central banks, there may be another nuclear option that the central banks could use to shore up the world financial system, besides the backing of a new currency with precious metals or commodities.

I first saw this on a blog on KWN where Michael Pento argued that if the world accepted that all sovereign debt was a Tier 1 asset, then the central banks could cut the reserve interest rate to zero or even charge to hold reserves for their member banks. This would likely push this money back to the member banks as a non-performing asset. These banks would then be encouraged to purchase Spanish and Italian debt.

If this were to happen, then the borrowing costs of Spain and Italy would fall and the euro would likely get a bid. With a stronger euro, the US and China exports would be helped and Germany would be freed from the task of bailing out Europe.

The reason this is a nuclear option is that he estimates that this would effectively double the world’s money supply.

Although the markets and the banks would be supported by this effort, the new money would quickly find its way to commodities and precious metals.

And best for the Fed and the other central banks is that they would not have expanded their own balance sheet, they would have just changed the rules again.

Since the real economy would not have improved it is unlikely that wages would rise, but the cost of living certainly would as energy, food and clothing respond to this wave of new money hitting the commodity sector.

A repeat of the “Arab Spring” would likely happen in multiple areas around the world where the middle class and poor are no longer able to compensate for the wisdom of their central planners.

The cost of saving the system will be laid upon those that can least afford to pay.

The central planners will then find that destroying the middle class was too high a price to pay for saving the banks.

Society can survive without the very poor and the very rich, but it can’t survive without the middle class that run everything.